Government to go for disinvestment

TOPIC: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Government Budgeting.

• Disinvestment means the sale of government’s stake in Public Sector Undertakings (PSUs) to private sector (company or an individual).
• It is counted under non- debt capital receipts.
• Department of Disinvestment was renamed as the Department of Investment and Public Asset Management (DIPAM) in Budget 2016-17 in order to widen its scope from disinvestment to strategic sale of PSUs and also monetization of idle assets.
• DIPAM under the Ministry of Finance looks after the disinvestment procedure.
• Any disinvestment of government’s shareholdings, closure or mergers of PSU need the approval of the Union Cabinet.

Benefits:

• Decrease in government shareholding will increase private shareholding. Private sector will have more say in the Annual General Meeting (AGM) and in the Board of Directors. It will increase the efficiency of the PSUs;will address over-staffing, and in turn will revive the loss-making PSUs.
• The fiscal deficit of the government will also go down.

Harms:

• If government continues to disinvest from PSUs, it might even lead to creation of private monopolies.
• If it makes profit in the future, then the government will get less dividend as it holds lesser shares of the undertaking now.
• Labour unions will oppose the move as they have a fear of being fired by private companies or a significant reduction in benefits.

Three methods of disinvestment:

1. Exchange Traded Funds (ETF)– Government will make a portfolio of shares of a number of PSUs. The portfolio manager issues new securities in the market on the basis of this portfolio. This is known as New Fund Offer (NFO). Any retail participant can buy these securities worth a minimum of Rs.5,000. These securities bought by the retail participants are known as ETF securities. They will get dividend whenever the PSUs make profit. They can also sell/ trade these securities on stock exchanges. This is why they are called as ETF. The 1st round of ETF was held in 2014. Modi government is planning to conduct the 2nd round of ETF for disinvestment of 10 PSUs.
2. Institutional Placement Programme (IPP)– The government will not sell its shares in the share market but will offer them only to non-retail investors, on the condition that 25 percent of the shares should be reserved for mutual funds and insurance companies, to prevent private monopolies.
3. Offer For Sale (OFS)– The government will issue its shares on the stock exchanges where both retail and non-retail investors will be allowed to participate. The condition is that 20 percent of the shares should go to retail investors (those bidding upto Rs. 2 lakh). This reservation is also done to prevent the formation of private monopolies.

Timeline of disinvestment:

• 1991 industrial policy: government started reducing its shareholdings from all PSUs.
• 1998 Vajpayee government: There will be no disinvestment in strategic sectors which are- Railways, Defence and Atomic Energy. But there will be disinvestment in other non-strategic sectors.
• UPA- 1: There will be no disinvestment in profit-making PSUs and will try to revive the sick ones. No major focus on disinvestment will be there.
• UPA-2 (2009-2014): There can be disinvestment of up to 49 percent of government’s shares. This means that the government will have to remain a majority shareholder. The money so received will be set aside in the National Investment Fund (NIF). From NIF, the money will be used for bank recapitalization or to help Metro, nuclear energy projects etc. They explored the ETF method of disinvestment in 2014.
• NDA : Modi government closed down 6 loss making PSUs and tried to revive 5 sick PSUs. It also started selling minor stakes in many of them. It is planning to conduct 2nd round of ETF in 2016.

Budget 2016 projections for disinvestment:

• There will be a receipt of Rs. 56,500 crore by way of disinvestment.
• Out of this Rs. 36,000 crore will come from minority stake sales from different PSUs. The money so received will go to the NIF which is part of the Public Account and will be used for developmental purposes.
• The remaining Rs. 20,500 crore will come from strategic sale of sick units. Strategic sale means selling of more than 50 percent of its shares.
• The details of disinvestment will be prepared by  NITI AAYOG.

Latest developments:

• The Cabinet Committee on Economic Affairs had directed Niti Ayog to identify PSUs that the DIPAM could take up for strategic disinvestment and also to suggest norms for doing so.
• The list of loss-making and sick government companies has been prepared by the Niti Aayog and submitted to the PMO last month.
• Niti aayog has recommended strategic disinvestment in 15 PSUs on priority basis.
• It has suggested closure of 25 companies in which revival plans had failed to be effective, after which their assets could be disposed off and employees would be offered voluntary retirement.
• It also recommended merger of several PSUs and to allow revival plans to continue in some of them.
• An inter-ministerial meeting of secretaries on July 5 will shortlist companies for closure and strategic disinvestment from the list submitted by the Niti Ayog.
• The meeting will recommend strategic disinvestment only in non contentious government companies.
• The government is trying hard to ensure that atleast one PSU is sold off this year.